CHAPTER IV

LEGAL TENDER1

THE essential idea of "legal tender" is that quality given to money by law which obliges the creditor to receive it in full satisfaction of a past debt when expressed in general terms of the money of a country. A debt is a sum of money due by contract, express or implied. When our laws, for instance, declare that United States notes are legal tender — and this is the only complete designation of a legal-tender money — for "all debts public and private," it must be understood that this provision does not cover any operations not arising from contract. Current buying and selling do not make a situation calling for legal tender; a purchaser cannot compel the delivery of goods over a counter by offering legal-tender money for them, because, as yet, no debt has been created.2

Contracts made in general terms of the money units of the country must necessarily often be interpreted by the courts. The existence of contracts calling for a given sum of dollars and the necessity of adjudicating and enforcing such contracts, require that there should be an accurate legal interpretation of what a dollar is. As every one knows, the name, or unit of account, is affixed to a given number of grains of a specified fineness of a certain metal. This being the standard, and this having been chosen by the concurring habits of the business world, it is fit that the law should designate that, when only

1 Report of the Monetary Commission of the Indianapolis Convention, pp. 131-7. The Hollenbeck Press, Indianapolis, 1900.

2"A contract payable in money generally is, undoubtedly, payable in any kind of money made by law legal tender, at the option of the debtor at the time of payment. He contracts simply to pay so much money, and creates a debt pure and simple; and by paying what the law says is money his contract is performed. But, if he agrees to pay in gold coin, it is not an agreement to pay money simply, but to pay or deliver a specific kind of money, and nothing else; and the payment in any other is not a fulfilment of the contract according to its terms or the intention of the parties." 25 California 564, Carpenter vs. Atherton.

dollars are mentioned in a contract, it should be satisfied only by the payment of that which is the standard money of the community.

Since prices and contracts are expressed in terms of the standard article, it is clear that the legal-tender quality should not be equally affixed to different articles having different values, but called by the same name. This method would be sure to bring confusion, uncertainty, and injustice into trade and industry. No one who had made a contract would know in what he was to be paid. The legal-tender quality, then, should be confined to that which is the sole standard. And it is also obvious that when a standard is satisfactorily determined upon, and when various effective media of exchange, like bank notes, checks, or bills of exchange, have sprung up, the legal-tender quality should not be given to these instruments of convenience. They are themselves expressed in, and are resolvable into, the standard metal; so the power to satisfy debts should be given not to the shadow, but to the substance, not to the devices drawn in terms of the standard, but only to the standard itself, even though, as a matter of fact, nine-tenths of the debts and contracts are actually settled by means of these devices. So long as these instruments are convertible into, and thus made fully equal to, the standard in terms of which they are drawn, they will be used by the business community for the settlement of debts without being made a legal tender. And whenever they are worth less than the standard they certainly should not be made a legal tender, because of the injustice which in such a case they would work.

Having shown that the legal-tender quality is only a necessary legal complement of the choice of a standard, it will not be difficult to see that the state properly chooses an article fit to have the legal-tender attribute for exactly the reasons that governed the selection of the same article as a standard. The whole history of money shows that the standard article was the one which had utility to the community using it. As the evolution of the money commodity went on from cattle to silver and gold, so the legal-tender provisions naturally followed this

course.

A state may select a valueless commodity as a standard,

but that will not make it of value to those who would already give nothing for it; and so, it may give the legal-tender quality to a thing which has become valueless, but that will not of itself insure the maintenance of its former value. This proposition may, at first, appear to be opposed to a widely-spread belief; but its soundness can be fully supported. It should be learned that a commodity, or a standard, holds its value for reasons quite independent of the fact that it is given legal recognition. It has happened that legal recognition has been given to it because it possessed qualities that gave it value to the commercial world, and not that it came to have these qualities and this value because it was made a legal tender.

A good illustration of this truth is to be found in international trade. Money which is not dependent on artificial influences for its value, and which is not redeemable in something else, is good the world over at its actual commercial value, not at its value as fixed by any legal-tender laws. It is not the legal-tender stamp that gives a coin its value in international payments. A sovereign, an eagle, a napoleon, is constantly given and received in international trade not because of the stamp it bears, but because of the number of grains of a given fineness of gold which it contains the value of which is determined in the markets of the world. And an enormous trade among the great commercial countries goes on easily and effectively without regard to the legal-tender laws of the particular country whose coins are used.

By imposing the attribute of legal tender, however, upon a given metal or money, it may be believed that thereby a new demand is created for that metal, and that its value is thus controlled. And in theory there is some basis for this belief. It is, of course, true that, in so far as giving to money a legaltender power creates a new demand for it (which without that power would not have existed) an effect upon its value can be produced. But this effect is undoubtedly much less than is usually supposed. It must be remembered that the value of gold, for instance, is affected by world influences; that its value is determined by the demand of the whole world as compared with the whole existing supply in the world. In order to affect the value of gold in any one country, a demand created

by a legal-tender enactment must be sufficient to affect the world-value of gold. Evidently the effect will be only in the proportion that the new demand bears to the whole stock in the world. It is like the addition of a barrel of water to a pond; theoretically the surface level is raised, but not to any appreciable extent.

It may now be permissible to examine into the extent to which a demand is created by legal-tender laws. If the article endowed with a legal-tender power is already used as the standard and as a medium of exchange, it is given no value which it did not have before. The customs and business habits of a country alone determine how much of the standard coin will be carried about and used in hand-to-hand purchases, and how much of the business will be performed by other media of exchange, such as checks or drafts. The decision of a country to adopt gold — when it had only paper before, as was the case in Italy - would create a demand for gold to an extent determined by the monetary habits of that country; and this demand has an effect, as was said, only in the proportion of this amount to the total supply in the world. This operation arises from choosing gold as the standard of prices and as the medium of exchange. To give this standard a legaltender power in addition does not increase the demand for it, because the stamp on the coin does not in any way alter the existing habits of the community as to the quantity of money it will use.

But in case an equal power to pay debts is given to fixed quantities of two metals, while each quantity so fixed has a different metallic value but the same denomination in the coinage, Gresham's law is set in operation with the result that the cheaper metal becomes the standard. After this change has been accomplished, the legal tender has no value-giving force. When the cheaper metal has become the standard, its legal-tender quality does not raise the value of the coin beyond the value of its content. This cheaper standard, in international trade, would be worth no more in the purchase of goods because it bore the stamp of any one country. Prices must necessarily be adjusted between the relative values of goods and the standard with which they are compared. If the

standard is cheaper, prices will be higher, irrespective of legaltender acts. Where two metals are concerned, then, the only effect of a legal-tender clause is an injurious one, in that the metal which is overvalued drives out that which is undervalued.

The example of an inconvertible paper, such as our United States notes (greenbacks) in 1862-1879, is still more conclusive. Although a full legal tender for all debts public and private, their value steadily sank until they were at one time worth only 35 cents in gold. In California, moreover, these notes, although legal-tender, were even kept out of circulation by public opinion. In short, the value of inconvertible paper can be but little affected by legal-tender powers. Its value is more directly governed, as in the case of token coins, by the probabilities of redemption. As bearing on the point that the value of the paper was more influenced by the chances of redemption than by legal-tender laws, we may cite the sudden fluctuations in the value of our United States notes during the Civil War. With no change in the legal-tender quality and no change in the indebtedness which might be paid with such notes, their value frequently rose or fell many per cent. in a single day owing to reports of Federal successes or defeats in battle, which had a tendency to affect one way or the other the public estimate of the probabilities of an early resumption of specie payments. The fact that they were legal tender evidently had no effect whatever in maintaining their value.

In view of the evident fact that legal-tender acts do not preserve the value of money, it is clear that the demand created by such legislation must be insignificant. And this must be so in principle as well as in fact.

There is but one thing which the legal-tender quality enables money to do which it could not equally well do without being a legal tender; that is, to pay past debts. An examination, however, shows that this use of money is very small compared with its other uses. The amount of past debts coming due and which might be paid in any year, month or day is insignificant when compared with the total transactions of that

1 For a contrary view, see Joseph French Johnson, Money and Currency, Chapter 13.- EDITOR.